Consider Future Interest Rates

This is the time of year that many farmers and ranchers are visiting their banker and reviewing their loans and looking to the future. Always a big question is when will interest rates increase and by how much? Dr. Dave Kohl, Globetrotting Emeritus ag econ professor from Virginia Tech shares some advice concerning where interest rates will be?
Kohl: “I think our producers need to not think about when the Fed is going to raise, but the trajectory. The trajectory might be a quarter or a half of a percent but just in case — all of our producers need to do sensitivity shock tests. Say it increases a half percent or one percent. How is it going to impact us? You know you go from a 4 percent to a 5 percent — that is a 20 percent increase. Everybody says, ‘They won’t go back to the levels of the 1980s.’ Well, they don’t have to go back to the levels of the 1980s, a 20 percent increase 4 to 5 percent could have detrimental impact. All ag producers need to look at how your debt is structured. Is it on fixed is it on variable? Where do the variable rates hit? It is on the operating money because most lenders aren’t going to fix the operating money — so that is where we are most vulnerable. So that is what will hit us on the margins. So you have to go in there and sensitivity test. Sensitivity tests are critical.”